Let Stockholders Decide Verizon-MCI Merger's Fate

Published in the Asbury Park Press 09/4/05 BY MURRAY SABRIN

The conventional wisdom about a business merger, especially when it leads to a near monopolistic control of a market, is that it is anti-competitive and thus should be disallowed by government regulators.

The proposed merger between Verizon and MCI is being opposed by consumer advocates and others because the new company would provide more than 80 percent of the wired phone connections in its regional market. According to the conventional wisdom, a Verizon-MCI alliance would be an example of a "monopolistic" company that will drive up prices and stifle competition in the telecommunications market.

On the face of it, opponents of the Verizon-MCI merger may have had a strong case if the world of telecommunications today looked like it did prior to the 1984 breakup of AT&T. Pre-1984, AT&T did have a 100 percent telephone monopoly in most regions of the country. AT&T also was the nation's only long-distance phone carrier at the time. However, after the Justice Department ordered the AT&T breakup, the regional Baby Bells, as they were called, became regional phone monopolies.

AT&T became a long-distance carrier and began to face competition from Sprint and MCI. Since the 1980s, virtually all the original seven Baby Bells have merged with one another and other phone companies. The remaining regional entities are SBC, Verizon, Bell South and Qwest, a non-Baby Bell that merged with US West.

Currently, SBC is seeking regulatory approval to merge with AT&T, while Verizon is seeking to merge with MCI. Opponents of the Verizon-MCI merger assert that consumers will pay higher prices than they ought to because the new firm will have a near monopoly in its operating region.

"Nonsense", respond the proponents of the Verizon-MCI merger. At the local level, telephone calling prices may be on the verge of an historical downward adjustment because of the latest technological developments. The telecommunications world of the 1980s and even 1990s is gone forever.

Cell phones, once a bulky, weighty and expensive piece of hardware that cost users about $1 a minute for service, has been replaced by units that fit in the palm of your hand and cost less than $50. Competition has driven the price of cell phone calls to about a penny a minute. In addition, more than a third of local phone calls and more than 60 percent of long-distance calls are made on wireless networks. In short, consumers are giving up their land lines, the ones provided by the Baby Bells, such as Verizon.

Meanwhile, cable companies are not your parents' or grandparents' cable company any more. They are providing not only clear reception, on demand video services and premium channels, but they also are in the telecommunications business, competing with the phone companies. Cable companies provide Internet access as well as phone service. VoIP (Voice Over Internet Protocol) technology has revolutionized the telecommunications industry. Consumers can now send and receive voice, video and data through their computer without the use of a telephone.

To state that telecommunications is changing rapidly is an understatement, if there ever was one. Technological breakthroughs are working their way from the laboratory to the marketplace in record-breaking speed. Companies cannot rely on their brand names or traditional infrastructure to meet the needs of consumers. Cable companies, wireless firms and phone companies are in one of the most competitive environments we have witnessed in our history.

If firms like Verizon and MCI believe their strategic goals and competitive advantages can be met by becoming one entity, then shareholders should make that determination, not regulators. The intense domestic and global competitive forces will cause telecommunications companies, especially the remaining Baby Bells, to provide consumers with high-quality and lower priced services - or else.

The name of the game is market share and utilizing the latest technological innovations that drive prices down. If a company, no matter how large its market share, does not embrace new technologies or meet its customers' needs, there are more than enough competitors for consumers to choose from.

Opponents of the proposed Verizon-MCI merger are "fighting the last war" -- preventing two merged companies from having more than 80 percent market share of a diminishing market. As long as a combined Verizon-MCI delivers services that its customers approve, then the marketplace will have spoken. Otherwise, Verizon-MCI's competitors, cable companies, wireless companies and unbeknownst firms in the future will be more than happy to sign up its customers.

Murray Sabrin is professor of finance in the School of Business at Ramapo College of New Jersey, Mahwah.

Copyright 2005 Asbury Park Press.

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